Bills Digest No. 16, 2005–06

WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.

The purpose of the Bills is to
remove competitive advantages said to have accrued to certain
medical defence organisations (MDOs) as a result of government
assistance to the medical indemnity market and to lessen the
financial burden on medical practitioners and health professionals
imposed under the original scheme of assistance.

In April 2002, United Medical Protection Limited (UMP) and its
wholly owned subsidiary Australian Medical Insurance Limited
(AMIL), who together provided indemnities to approximately 60 per
cent of Australian doctors, went into provisional liquidation. As a
result, the entire medical indemnity regime in Australia was
undermined.

In response to this crisis the Government rolled out a series of
measures to alleviate the upward pressure on insurance premiums and
the unsustainable operating environment that existed for some
medical indemnity providers. The measures included the Run-off
Cover Indemnity Scheme, the High Cost Claims Scheme, the
Exceptional Claims Scheme, the Medical Indemnity Premium Subsidy
Scheme and the Incurred But Not Reported (IBNR) Indemnity
Scheme.

In May 2002, the provisional liquidator appointed to UMP/AMIL,
Mr David Lombe, identified three major factors contributing to the
failure of UMP/AMIL:

the lack of reserving for long term liabilities and consequently
insufficient premium pricing and failure to account for incurred
but not reported risk

the lack of management experience within the organisation,
and

the adverse financial impact of the amalgamation which created
the UMP Group.(1)

At the time the provisional liquidator was appointed, UMP/AMIL
was in severe financial difficulties. UMP and AMIL had a deficiency
of net assets of $49.869 million and $38.6 million
respectively.(2) In addition to this, UMP/AMIL had an
estimated IBNR liability of $455 million.(3)

Following the appointment of the provisional liquidator, the
State and Federal Governments implemented a series of measures to
help re-establish the UMP Group. The scheme whereby the Federal
Government put in place arrangements to pay for UMP/AMIL s unfunded
IBNR claims(4) was one such measure. When established,
the scheme was to be funded by imposing a levy (the IBNR levy ) on
doctors who were members of UMP/AMIL on 1 July 2000.(5)
The legislative arrangements for the IBNR scheme are set out in
Part 2 Division 1 of the Medical Indemnity Act 2002.

Doctors became aware of the size of the IBNR levy when they
received the levy notices in August 2003. Essentially doctors were
required to pay 50% of their annual subscription to UMP/AMIL for
the financial year that commenced on 1 July 2000. This was in
addition to their normal insurance premiums. Once doctors were
aware of the size of their liabilities under the scheme, they
expressed strong opposition to the proposal. At a time when premium
levels were already regarded as being unaffordable or nearing
unaffordable levels for some parts of the medical profession, the
doctors regarded the imposition of this levy as completely
unsustainable.

Following significant opposition from the medical profession to
the IBNR levy, the Government, on 3 October 2003, agreed to an
eighteen month moratorium on IBNR levy payments in excess of $1000.
The Medical Indemnity Amendment Act 2003 and the
Medical Indemnity (IBNR Indemnity) Contribution Amendment Act
2003 implemented the IBNR levy moratorium.

At the time that the moratorium was announced, the Government
also stated that it would set up a policy review process to further
consider the medical indemnity issues, such as the IBNR levy
scheme. The Medical Indemnity Policy Review Panel (the Panel)
considered and reported on this issue in December 2003. It noted
the following:

Latest advice from the Australian Government
Actuary suggests that while the aggregate IBNR for UMP as at 30
June 2003 is now $482 million in net present value terms, the levy
on doctors need only raise $261 million. The balance is made up of
Government funded payments under the High Cost Claims Scheme,
subsidies and exemptions.

The Panel considers that is appropriate for UMP
doctors to make a contribution towards the cost of the IBNR
liability incurred by UMP ..

If the levy is to be retained, the Panel suggests
that any contribution required from doctors should be set as a
small percentage of their current income rather than the premium
they paid in 2000-01. This would address the problems faced by
doctors who have reduced their workload or even left practice since
2000-01.

The Panel also suggests that if the levy is to be
retained the length of time a doctor should pay the levy should be
linked to the period they belonged to UMP before 30 June 2000.
Doctors who were members for only one year should only pay the levy
for a year, those who were members for two years should pay for two
years and so on up to a maximum period of six
years.(6)

The Medical Indemnity Amendment
Act 2004 and the Medical Indemnity (IBNR Indemnity)
Contribution Amendment Act 2004 implemented the Panel s
recommended changes to the IBNR levy scheme. As well as reducing
the amount that doctors were required to pay, these Acts renamed
IBNR Indemnity Contributions to UMP Support Payments .

UMP Support Payments will be further
reduced under these Bills (see below).

In December 2004, the Federal Government set up a review to
inquire into whether the assistance given to the medical indemnity
insurance industry was benefiting some industry participants more
so than others and if so, to advise on options to redress the
imbalance.

The review concluded, amongst other things, that the specific
assistance granted by the Government to UMP through the IBNR
Indemnity Scheme (and not granted to any other medical indemnity
provider) resulted in a competitive advantage to AMIL. The
Government assistance through the IBNR Indemnity Scheme meant that
the Government assumed responsibility for UMP/AMIL s legacy,
allowing the group to concentrate on the future. Other medical
indemnity providers who did not benefit from the IBNR Indemnity
Scheme needed to manage and fully fund their legacy obligations, as
well as competing in the current market place.(7)

The review proposed three options for addressing the competitive
advantage received by UMP/AMIL under the IBNR Indemnity
Scheme:(8)

for UMP/AMIL to take back the obligations of the IBNR liability
and raise the appropriate level of capital in the market place to
cover that liability,

for UMP/AMIL to make a regular series of payments to compensate
the Commonwealth for the assumption of the IBNR liabilities, or

for the Commonwealth to provide equivalent support to the other
medical indemnity insurers or MDOs.

The review considered the only practical or desirable option was
for UMP/AMIL to make regular repayments to the Commonwealth as
compensation.

In submissions to the review of competitive
neutrality the AMA stated that:(9)

the level of Government assistance given to the indemnity
industry does not need to be wound back, but if any adjustment is
to be made it should be by way of redistribution, fully utilising
the level of support granted by the Government

if restoration of competitive neutrality required some
withdrawal of support from an insurer, because of the impact on
insurance costs for doctors, mechanisms are required that
incorporate an appropriate return to doctors of the full amount of
the withdrawn support, to ensure that premiums remained affordable,
and

options to restore competitive neutrality should consider
formulae for redistributing any maldistributed government
assistance to reduce the indemnity costs of members obliged to pay
the UMP Support Payment where that payment poses a burden out of
proportion to their colleagues in similar craft groups or
practices.

In responding to the review, the Federal
Government accepted the findings of the review and stated that they
would act to remove the competitive advantage by requiring that
medical indemnity insurance groups who have benefited from the IBNR
Indemnity Scheme make a series of repayments to the Government.

In addition, the Government s response provided
for the funds received from those repayments to be used to reduce
the payments of doctors under the UMP Support
Scheme.(10)

It is now proposed to exempt the
following from the requirement to make UMP Support Payments for
years starting on or after 1 July 2005:

medical practitioners who are participating members of a
participating MDO and whose gross Medicare billable income is less
than or equal to $50 000

health professionals who are participating members of a
participating MDO and whose gross medical income is less than or
equal to $50 000

participating members of a participating MDO if the applicable
percentage of the annual subscription for the base year for the
member is less than or equal to $1 000

It is also proposed to:

reduce the maximum number of years for which a person is liable
to make a UMP Support Payment from 6 to 4

reduce by $1000 the amount of UMP Support Payment that a
participating member of a participating MDO will make for years
beginning on or after 1 July 2005.

Under clause 59A a person is liable to pay a
competitive advantage payment for a financial year if they are a
medical indemnity insurer the financial year is a contribution year
and the person is not exempt under clause 59C.

Clause 59C provides for regulations to be made
specifying persons exempt from the competitive advantage
payment.

The process set out in clause 59E includes:

the Australian Government Actuary reporting to the
Minister an assessment of an MDO s net IBNR exposure at the end of
the financial year, including the reasons for that assessment,

provisions for the HIC to request information from an MDO if the
HIC has reasonable grounds for believing that the MDO is capable of
giving information relevant to the Actuary s assessment of net IBNR
exposure, and

provision for the Minister to publish in the Gazette the amount
of an MDO s net IBNR exposure.

Item 1 of Schedule 2 amends the Medical
Indemnity Act 2002 to exempt a medical practitioner from the
UMP Support Payment if their Medicare billable income is $5,000 for
the 2003 or 2004 contribution years, and otherwise if their
Medicare billable income for a contribution year is $50,000.

Item 2 of Schedule 2 amends the Medical
Indemnity Act 2002 to exempt a health professional from the
UMP Support Payment if their gross medical income is $5,000 for the
2003 or 2004 contribution years, and otherwise if their gross
medical income for a contribution year is $50,000.

Item 3 of Schedule 2 amends the Medical
Indemnity Act 2002 to insert a new exemption a to the UMP
Support Payment to participating members of a participating MDO if
for the 2005 contribution year if the members applicable percentage
of the annual subscription to the MDO is $1,000 or less.

Item 4 of Schedule 2 amends the Medical
Indemnity Act 2002 to reduce the maximum number of years for
which a person is liable to pay the UMP Support Payment from 6 to
4.

Items 6 to 9 of Schedule 2 amend the
Medical Indemnity (UMP Support Payment) Act 2002 to reduce
the amount of the UMP Support Payment that members are liable to
pay, to be the least of:

$4,000 (reduced from $5,000), and

the amount by which the applicable percentage of the member s
annual subscription for the base year exceeds $1,000 (reduced from
the applicable percentage of the member s annual subscription for
the base year), and

for medical practitioners, 2 per cent of the amount by which the
member s gross Medicare billable income for the year exceeds
$50,000 (reduced from 2 per cent of the members gross Medicare
billable income for the year), and

for health professionals, 2 per cent of the amount by
which the member s gross medical income for the year exceeds
$50,000 (reduced from 2 per cent of the members gross medical
income for the year).

Clause 4 provides for the imposition of a tax
in the form of a competitive advantage payment on medical indemnity
insurers with a participating MDO.

Clause 5 limits the contribution years in which
the tax in clause 4 may be imposed to the financial years 1 July
2005 to 30 June 2015.

Clause 6(1) sets out the formula for
calculating the competitive advantage payment, being an applicable
percentage of the product of the medical indemnity insurer s net
IBNR exposure and the factor of the IBNR exposure which is
unfunded.

Clause 6(2) places limitations on the
regulations that can be made under the Bill (as provided for in
clause 7) insofar that those regulations must not specify an
applicable percentage for the purposes of clause 6(1) greater than
15 per cent.

Concluding Comments

The Bills implement the recommendations of the review of
competitive neutrality into the medical indemnity industry by
providing for a competitive advantage payment from MDOs which
benefited from the Government s IBNR Indemnity Scheme.

In this way the Bills are aimed at reducing (and hopefully
eliminating) the competitive advantage gained by some medical
indemnity insurers through the implementation of the IBNR Indemnity
Scheme. The effectiveness of this move will probably be reflected
in premiums within the medical indemnity insurance industry.

In addition to the recommendations of the review, the Bills also
implement a reduction in the UMP Support Payment, an option
suggested by the AMA in its submissions to the review of
competitive neutrality. The impact of the Bills therefore is to
reduce (and in some cases eliminate) the burden on medical
professionals liable to pay the UMP Support Payment.

United Medical Protection & Ors [2003] NSWSC 1031,
p. 21. Further analysis of the collapse of UMP/AMIL can be found in
this judgment where Justice Austin considers the termination of the
appointment of the provisional liquidator and discontinuance of the
winding up proceedings for the UMP Group.

ibid., p. 14.

ibid., p. 19.

Historically, MDOs provided their members with claims incurred
cover. Under a claims incurred policy, doctors were insured against
injuries to patient brought about through conduct which took place
during the term of the policy. The patient s claim could be
notified to the MDO at any time; ie during the term of the policy
or once the term of the policy has ended (for example, five years
after the term of the policy has ended).

Incidents which occur during the term of the policy, giving rise
to a claim that is reported to the MDO after the policy terms have
ended are referred to as incurred but not reported claims.

The legislation that put this scheme into place was the
Medical Indemnity Act 2002 and the Medical Indemnity
(Enhanced UMP Indemnity) Contribution Act 2002.

This paper has been prepared to support the work of the
Australian Parliament using information available at the time of
production. The views expressed do not reflect an official position
of the Information and Research Service, nor do they constitute
professional legal opinion.

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